The long-term costs of lowering maintenance fees

A condo lawyer warns of the potential consequences of a recent trend toward austerity

Friday, September 18, 2015

By Megan Mackey

Maintenance fees are currently a hot topic of debate in condominium circles. On one side of the debate, consumer advocates suggest that low maintenance fees are desirable because they increase property values and make condominium living more affordable. On the other side of the debate, industry professionals warn that artificially reducing maintenance fees could be catastrophic in the long run.

Because each condominium is unique, a simple calculation of maintenance costs per square foot says little about a condominium’s level of services, efficiency, or budgeting practices. Recent reports criticizing high maintenance fees have highlighted the shockingly high cost of parking in condominiums. Parking in a temperature-controlled, well-lit, ventilated parking garage is significantly more expensive than parking on an uncovered driveway at a house, where the resident has to shovel and scrape in the winter. As part of their maintenance fees, condominium owners should expect to pay the cost of the services offered in their building as well as the cost of maintaining the building.

Recent news articles have profiled the Toy Factory Lofts, a condominium in downtown Toronto which recently cut maintenance fees by a virtually unheard of 30 per cent. The president of the board credits their low maintenance fees with increasing property values at a rate which outpaces similar buildings. This suggestion makes perfect sense because, all other things being equal, most buyers would probably choose to own in a building with lower maintenance fees. History suggests that those increases in market value may unfortunately not be sustainable.

How did the Toy Factory Lofts condominium reduce its maintenance costs? Some of the reduction is due to well-thought-out building adjustments, such as reducing hallway temperatures in the winter. Such cost saving initiatives should be applauded and encouraged as a way of keeping condominium living more affordable.

What has industry professionals concerned is the strategy of questioning reserve fund studies line by line, and bringing engineers onside with “austerity.” This suggests that boards are lowering reserve fund contributions by cajoling the engineer into reducing anticipated repair cost estimates.

Although Miller Thomson has acted for many condominium corporations, it has never encountered a condominium board complaining of surplus funds in its reserve account, wishing past owners had paid lower fees. To the contrary, the firm has helped many condominiums borrow money or sell assets to fund urgent repairs. Reserve funds should be funded conservatively.

So what happens to a condominium with an underfunded reserve fund? When faced with large or unexpected repair bills, these condominiums must fund repairs through special assessments. Some condominiums choose to borrow the money and have owners cover the monthly loan payments over a number of years. Others levy the entire amount in a lump sum, leaving owners to finance the special assessment through their own resources. Some proponents of lower maintenance fees believe that paying repair costs through these types of assessments is the way to go, and that condominium owners should expect to be assessed from time to time as repairs are needed.

Miller Thomson disagrees with this proposal for several reasons. While some affluent condominium owners might be able to handle this financial uncertainty, many condominium owners rely on their condominium’s budgeting and find unexpected special assessments difficult to cope with. More worryingly, this would permit board members to defer or ignore large repair projects, and sell their units before others realize the predicament. It would turn condominium ownership into a lottery, allowing some to benefit from low maintenance fees and artificially inflated market values at the expense of others who buy just before the building systems start to break down.

In 2011, warnings about the “hidden dangers” of low maintenance fees began to surface. The condominium at 40 Panorama Crt. in Etobicoke was featured in newspaper articles at the time, although its situation was not unique. That high-rise building suffered from years of neglect due to unreasonably low maintenance fees. Unit owners reportedly bullied board members and blocked attempts to raise fees. Successive boards of directors postponed repairs for years until, in the words of one judge dealing with the fallout, “the inevitable day when the chickens came home to roost.” By 2011, the building was 32 years old and much of the building’s infrastructure was past its useful life. Upon taking over, an administrator levied millions of dollars in special assessments in an attempt to cope with an operating deficit of $670,000 and to repair parts of the building which had been deemed unsafe, including the parking garage and balconies.

Before this, 40 Panorama Crt. had enjoyed better resale values, which may have been buoyed by artificially low maintenance costs. When the building’s desperate state came to light, resale values began to fall. One owner reported paying $124,000 for her three-bedroom unit in 2000. By 2011, similar units were selling for $110,000. A current (April, 2015) MLS search showed nine units for sale in the building, with three-bedroom units listed at $68,000, $79,900, and $99,500.

Those pushing for deep cuts to maintenance fees at all costs should consider the children’s fable of the ant and the grasshopper. The ant spends his summer working hard to prepare for the winter, while the grasshopper spends his time singing and scoffs at the notion that he should spend his days preparing for the future. In the end, the grasshopper finds himself left out in the cold when the harsh winter comes. The Condominium Act is designed to protect condominium owners from becoming the grasshopper, and board members should not try to circumvent it for short term gain.

One thought on “The long-term costs of lowering maintenance fees”

Interesting & something that I come across a lot.
Lowering maintenance fees means that interior upgrades can’t be performed properly.
And,… older buildings do need to look and keep their market value relative to new product.
How to reduce maintenance fees? Avoid buildings that have labour intensive amenities.

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